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Emerging Market Equities See Valuations Rise on Fundamentals

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Valuation movement

Emerging market equities are trading at 10.53x on a one-year forward earnings basis. Valuations rose by 3.10% in the week ended September 11, 2015. The rise was mainly due to buying in India’s equities on higher industrial production and low inflation.

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China and India

China’s industrial production grew by 6.1% in August compared to analyst forecast of 6.6%. However, retail sales advanced 10.8% on a year-over-year basis, exceeding analyst estimates.

India’s equities saw valuations rise on higher industrial production, low inflation, and the expectation of a rate cut by the nation’s central bank. The nation continues to see good growth in foreign direct investments in defense, industrials, and infrastructure.

Historically, emerging market equities (EEM) have been valued at a discount compared to European (EFA) and US equities (SPY). The discounts have continued in the last few months on a steep fall in commodities and emerging market equities.

Brazil

Brazil’s equities and macroeconomic situation are facing a decline on credit rating agency Standard & Poor’s revision of its rating to junk or BB+. This is below the investment grade of BBB-. Brazil has been affected largely by falling commodity prices, political scandals, high inflation, and falling economic activity. The Brazilian real fell 31% in 2015. Brazil’s equities fell 37% in 2015 in US dollar terms.

Asset managers will have to redeploy their capital in the short to medium term to take advantage of the shifts in these emerging market economies.

Asset managers that could benefit from emerging market equities’ strong performance include Franklin Resources (BEN), BlackRock (BLK), Fidelity Investments, Goldman Sachs (GS), HSBC Global Asset Management (HSBC), and Blackstone (BX).

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